1. How did Roger Stone’s management of the company compare to that of his predecessors? In general, would you judge his leadership to have been successful? Why or why not?

Stone Container Corporation (“Stone”) has historically been an acquisitive company. However, in the wake of the Great Depression, its founders established a longstanding policy to “not to carry any significant debt for long periods of time”. Prior to 1979, acquisitions that served to diversify the company’s product offering and geographic presence were typically paid for with a combination of cash and loans that were repaid early. While Stone completed an initial public offering in 1947, the business remained conservatively capitalized thereafter with family ownership in the majority at 57%.

Roger Stone, with highly leveraged acquisitions of distressed producers, stimulated much higher financial and equity risks with the addition of layered debt. He was able to expand capacity more than 5 times at one-fifth of the normal cost of building new plants; however the high degree of operating leverage inherent in the production of paper/ paperboard exposed the company to a greater degree of cyclicality and pricing risk. Given the high fixed-cost nature of paper manufacturing, Roger’s aggressive capacity expansion left the company particularly exposed to periods of decline where producers will cut prices before production. Further, via additional equity offerings overseen by Roger, the Company’s family ownership was diluted to 30% by the late 1980’s.

Initially, Roger’s strategy was fairly successful as he was growing the earnings of the business and fulfilling debt obligations. While the acquisition of Bathurst turned Stone into an industry juggernaut with new access to the European market, a 47% purchase price premium was paid near the peak of the industry cycle. The Bathurst transaction was